updated 10/1/2009 8:25:43 AM ET 2009-10-01T12:25:43

The U.S. economy will be growing again by year end, but tight credit conditions for consumers and businesses will hamper the recovery, the International Monetary Fund said Thursday as it raised its forecast for growth next year to 1.5 percent from 0.8 percent.

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The IMF also issued a warning about U.S. public finances, saying government debt "could become unsustainable" unless measures are taken to restrain deficits, and that President Barack Obama and Congress should make sure health-care reform does not make deficits worse.

Still, stimulus spending by Washington and local governments, along with rock-bottom interest rates from the Federal Reserve, have halted the slide. "Unprecedented monetary, financial, and fiscal policy interventions are helping stabilize consumer spending and housing and financial markets, which points to renewed moderate growth in the second half of 2009," the organization said Thursday in its World Economic Outlook.

Though crediting policymakers in the Federal Reserve and in government for their response to the financial crisis, which has helped prevent a 1930s-style depression, the fund said limits on credit availability will remain a key constraint on the pace of recovery.

Credit remains difficult to obtain for many households and businesses, with bank loan standards continuing to tighten, although at a slower pace, it said.

"Although financial conditions have improved significantly in recent months, markets remain stressed, and this will weigh on investment and consumption," the IMF said. "Combined with the impact of rising unemployment, the temporary nature of the fiscal stimulus, and subdued growth in trading partner economies, growth will remain sluggish."

Fourth-quarter growth
It predicted the economy would grow 1.9 percent in the fourth quarter compared to the same quarter the year before. The most recent official figures are an annualized 0.7 percent shrinkage in the second quarter and a sharp 6.4 percent annual drop in the first quarter.

The IMF said potential growth is likely to remain below 2 percent for a considerable time as U.S. consumers tighten their belts and build up their savings following a spending spree largely built on easy access to cheap credit.

Olivier Blanchard, the IMF's economic counsellor, said what happens with U.S. consumption, which largely fueled the boom times before last year's crisis, over the coming years is likely the biggest uncertainty surrounding the world economy.

In an interview with the Associated Press, Blanchard said one of the main downside risks to its forecasts is "how U.S. consumers are going to behave."

On a more positive note, the IMF said its analysis suggested that American banks have recognized more than half of their projected losses from impaired assets through 2010, and that government stress-testing has helped "rebuild trust" in the banks, which faced a battle for survival when the crisis hit full blast around a year ago.

The IMF said the unemployment rate would exceed 10 percent by early next year. It has already climbed by over 4 percentage points during the past year to a 26-year high of 9.7 percent in August.

Rising debt
It said government debt will continue to rise rapidly, reaching nearly 110 percent of the country's gross domestic product by 2014 — "a worrisome deterioration given looming health care and pension pressures related to population aging."

And though the IMF welcomed the current budget proposal as increasing transparency about such pressures by including medium-term forecasts, it said these are "based on growth assumptions that seem optimistic."

It said the shape of health care reform will also be critical — President Barack Obama is facing a bruising battle to get his health care bill through Congress.

It warned that the U.S. health care system had "significant inefficiencies," in that states get equivalent levels of care for different costs. "With this is mind, coverage should only be expanded in a budget-neutral manner, and measures are needed to bring down the rate of cost growth to help maintain debt sustainability," it added.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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